Some thoughts on energy policy for the new administration. These are not particularly satisfactory from a political standpoint, but will provide a long-term solution to our dependency on foreign oil, our waste of energy resources, and what’s needed to accelerate alternative energy sources. As well as possible fix to Detroit.
Alternative energy sources make economic sense only when there is a sustainable gap between conventionally sourced energy costs and the cost of the alternative energy source(s). The reason that US government initiatives have all failed since 1972 has been that there is no sustainable economic gap in favor of alternative energy sources. Free markets have rightly been allowed to govern, and schemes by the US government and OPEC have failed, both in their individual expectations and desires. There is no surprise then that $147/b oil caused demand to fall and miles driven/flown by consumers have caused prices to fall. Alternative energy sources will not be commercialized until there is a sustainable economic advantage to promote their development and use.
Alternative energy hype created by 2Q08 price peaks and feeble rhetoric by both sides of the aisle during the last campaign will not put us on a path toward energy independence any more that Jimmy Carter’s fireside sweaters. On the other hand, there are some systemic problems that government can address and solve if there is the political will and the populace will follow.
I believe the cornerstone of an energy policy that works is twofold: and economic variable gap created by essentially a tax and a fast tracked nuclear initiative.
1. Variable gap / Tax to support alternative fuel economics
While unsavory, we have lived briefly through $4/gal gasoline last summer. Europeans regularly have paid two to four times what we pay as the data shows.
If our government were to set an initial target based on landed crude oil at $120/B (“target”), the gap between current prices and the target would essentially be a tax distributed to all petroleum product consumers. As the market price of landed oil exceeded the initial target, the target price would rise dollar-for dollar, but never fall below the initial target. The proceeds would have to be used with discipline: infrastructure development and national debt repayment. NO earmarks whatsoever allowed. No new social programs. Not politically correct, but those are the rules. The proceeds of this tax would be huge, but the pain would be shared by all who drive/fly. The advantages would be huge as well:
· Demand for imported oil would fall.
· GNP would take an unsavory and apolitical hit; however, what better time to tighten the belts when we are in the midst of a major belt tightening in 2009. Obama is for change, right?
· OPEC/Russia/Venezuela and other exporting countries would be hurt by our depressed demand….is this such a bad idea considering there is no particular kinship with these suppliers?
· Deep water drilling and very high cost prospective oil basins now become less risky….OPEC and others suffer further. The point of Peak Oil is pushed further into the future. I’m worried about our kids….let their kid’s kids worry about the next steps beyond the variable gap proposal. If we continue to lack the political will to not drill ANWR, that’s ok since the variable gap tax will spur sustainable alternatives.
· No longer would we need CAFÉ mpg standards for our automobiles….the fuel price mechanism would dictate that demand for high mileage cars would plummet. Look at Europe.
· No need to provide bailouts for Detroit, since they can plan with clarity for the smaller higher mileage vehicles that consumers would demand. A kid could figure this out, and if Wagoner/Gettlefinger can’t, then Detroit will pay the ultimate price. Goodbye. I as a taxpayer would rather pay $4/gal than subsidize a Detroit that can’t figure it out, can’t make cars I want, and can’t earn a profit on cars that they do sell.
· Look what happens to alternate fuels:
§ We now have stability and predictability of the economic gap necessary to sustain alternative fuel development and commercialization.
§ Coal-to-gas/liquids, oil shale, biofuels, etc., all energy forms with long lead times and high CAPEX now can be planned for, developed and commercialized. If SASOL and Hitler’s coal-to- liquids WW II plants made sense for strategic reasons, now they make sense for economic reasons.
§ Solar at a current cost of $.10-$.20/kwh which is greater than electric from coal, now looks more attractive and R&D to lower these current costs will be more fruitful. Moore’s law will come to solar.
§ Wind at a current cost of $.08/kwh which is greater than electric from coal, now looks attractive
§ Adoption of the variable gap tax obviates the need for subsidizing US produced ethanol (and at the same time we must remove the tariffs on ethanol imported from Brazil).
2. Nuclear
There is no question that nuclear power is one of the solutions, but burgeoning capital costs for reactor construction due to regulatory delays must be controlled.
Government can and should fast track not only site/construction approvals, but condition the approvals on a highly demanding construction timetable that will benefit from “eminent domain” considerations. What is meant here is that those not-in-my-backyard destructionists chained to the construction gates will NOT slow down the fact track mandate of our new Federal Government. Obama might even have to sacrifice a second term for the good of the country. Truman proposed such avant garde steps after WWII (suggesting the rail strike be taken over by drafting workers and nationalizing the steel mills during the Korean conflict).
The US invented nuclear technology only to have the French today possess far superior nuclear technology; perhaps some national pride can be reverted by a “Manhattan-type project”-construction-fast-track initiative for nuclear power plants during the next 5 years.
Also, let’s also solve the spent fuel issue once and for all. We’ve been studying Yucca mountain since 1978, while spent fuel stockpiles in over 120 sites around the country stifling demand to add more reactor capacity. Can this foolishness continue?
3. Add-ons to make this a compete energy program
a. Solar isn’t all high tech photovoltaic’s…..solar water heating has been around for centuries. China leads here…..their apartment complexes are literally covered with roof- mounted hot water heating systems. They’ll work anywhere even in cold climates. Give homeowners and apartment owners a dollar-for-dollar tax credit that will give less than 2 year payouts.
b. Accelerate the high voltage grid, but make it DC….far more efficient and the best way for transmitting power from wind farms in remote and offshore locales to the demand centers.
c. Fast track all wind and solar projects after implementing the variable tax program.
d. Build a pumped storage facility with every solar farm that will now be fast-tracked. In this way, you stabilize the supply of power since the pumped storage facility stores electricity from solar when the sun goes down.
e. Since we become more of an efficient and lower cost electric society, government will subsidize your next automobile purchase, as long as it’s a plug-in. Again the hit to OPEC, et al.
f. For us investors, the course would be clear if this program were adopted…..buy long GE, Vestas, Toshiba, Westinghouse’s and all the infrastructure construction companies of the world……short OPEC. Not necessary to “mandate buy USA” since we finally are on a track that ultimately fixes the problem (and pays down our huge debt that threatens our very way of life).
T. R. KorzeneckiPrincipal Managing DirectorGrand Avenue Capital Partners, LLCInvestment Bankers Member FINRA SIPC600 S. Lake Avenue, Suite 507 Pasadena, Ca 91106626-405-1500 office626-676-1880 mobile
626-405-1575 fax626-441-2169 home office China cell: 136-2180-3109
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